Guest post from friend of Alhambra, Brian Cronin:
REFLECTIONS ON THE EURO AND THE “PROUD” POUND
If you asked most Brits what they thought about the euro, their answers would likely be short and pithy, and none too flattering. This rather insular attitude has the faint whiff of disdain. It is new, it is foreign and, well, just not British. It is reflected in the old newspaper headline “Fog in the English Channel – Europe cut off from civilization”.
Though it joined the European Community, Britain chose not to participate in the euro experiment. A currency has to make sense and the euro doesn’t. After the Second World War and a century of being the best of enemies, Germany, France and others tied themselves together economically and beat their swords into plowshares so that there would be no need to go to war any more.
I remember a rather one-sided conversation with an older taxi driver in Frankfurt on my way to an appointment at the Bundesbank, just before the euro got underway. He told me that it was not the first time that there had been a single European currency. A few years earlier, he said, there was the Reichsmark and that had worked rather well for a while. I thought it prudent to say nothing in response.
Personally, both as a former Brit and a participant in the FX markets, I am not fond of the euro. Yes, it can facilitate trade and make it easy to go all over most of Europe without having to change currency at each border. But it also had the effect of making redundant a lot of currency dealers who used to trade the old ‘legacy’ currencies and the pressures and strains within the old European Monetary System. It provided years of fruitful employment for many both in trading and sales.
If you take the view that the exchange rate is an expression of the worth of one economy against another, you can argue that the euro/dollar rate is as much dollar weakness as euro strength. Heaven knows with our balance of payments, low interest rates, budget deficits and national debt, we are not exactly a ringing endorsement for monetary and fiscal discipline. But Europe is a whole other matter.
After reunification in 1991, Germany made the exchange rate 1:1 for East Germany’s Ostmark against the Deutschemark. That made no sense economically, but it was an historic opportunity which could not be passed up and so the German government made a political decision.
Similarly with the euro, you have a variety of nations which have been cobbled together because it made political sense not economic sense. Clearly, Germany was the locomotive for this train and for that reason, it was going to insist that the newly created European Central Bank was going to be in Frankfurt. Britain wasn’t involved so it couldn’t be London. Paris lost out, as did Amsterdam. The southern capitals of Rome, Madrid, Lisbon and Athens were out since “too much sun fries the brains” as one wag put it, and it was too cold in Scandinavia. So Frankfurt it was.
The hegemony that Germany enjoyed then and enjoys still is reflected in the attitudes of many Germans when confronted with the recent crisis in Greece. Why bother with such a bunch of losers, they said? Though the powers that be have congratulated themselves that disaster has been averted and the problem resolved, they have merely ensured future inflation by providing liquidity to the market. They have kicked the can down the road, to use that tired old cliché. But that road might soon turn into a cul-de-sac. Madrid and Lisbon – watch out!
Greece has had to endure severe austerity measures already with more to come. Because of perceived German heavy-handedness, Greeks have called the Athens office of the “Troika” (the ECB, the EC and the IMF), “Gestapo headquarters”. But the Greeks only have themselves to blame. The national pastime seems to be not paying taxes which would certainly help curb government profligacy. But when you effectively have the ability to borrow at German interest rates when you don’t deserve to, then there will be consequences. As they say in Britain: “don’t care was made to care”.
If you visited the UK in the seventies, there was always someone on strike, usually the miners and the railway workers, crippling the country and presenting a dilemma for the government and the public finances. One such was the sterling crisis of 1976. FX sales desks largely grew out of this crisis when the IMF was called in to help resolve those pressures.
At that time, clients who called in to trading rooms talked to whoever picked up the phone and much of the time, they did not have time to talk to panicked clients because the traders were eyeing losing positions as the pound tumbled and caused turmoil in other currencies too. That’s when most banks realised that they had to have a separate group of people to talk to clients for as long as the clients wanted to talk and who were not concerned about losing money. It should also be said that some of the biggest sellers of ‘cable’ (sterling/dollar) at that time were the British banks themselves. Not much patriotism there.
After the Bretton Woods agreement in 1945, the rate was $4.00 to the pound. It was devalued in 1949 to $2.80 and again in 1967 to $2.40 and the public was assured by PM Harold Wilson that it would not change “the pound in your pocket”. Hah! After President Nixon closed the gold window in 1971, the pound floated freely and has been losing value ever since. Even when it pokes its head above $2.00, it doesn’t stay there very long. So, though cable dealers liked to call it “the proud pound”, its history is otherwise. Yet at least the currency makes sense. The Bank of England and UK government have control over monetary and fiscal polices and retains sovereignity over its own destiny. The euro doesn’t have that.
The ECB has monetary control but without the ability to enforce fiscal discipline, get the member governments to abide by the Maastricht Treaty and keep within set budgetary and debt limits as outlined by the Growth and Stability Pact, it cannot work. The printing press has been in full swing at the ECB, and for Germans familiar with the “wheelbarrow” inflation of the Weimar Republic, that cannot be a happy thought.
Prior to “Big Bang”, the deregulation of the London markets in 1986, Hoare Govett published a booklet called “1992: An Unworkable Utopia” which was a review of the plans for the single European market. In 1996, the Center for the Study of Financial Innovation published “The Crash of 2003: An EMU Fairy Tale”. You can argue that both had axes to grind and things have not developed quite as they had in mind but the premise was basically the same. Unless you control all of the reins, this dystopian enterprise is doomed to failure. Greece and maybe others will have to be cut loose and go it alone. Otherwise it will all end in tears.
Brian Cronin worked in banking for 40 years, 35 of them in currency sales and trading. His last post was with ANZ Bank as VP, Markets Division where he produced a widely followed weekly commentary on currency markets. He is now retired and living in South Carolina – at least until we can coax him into joining us here at Alhambra.